Reverse Mortgage California
Is a Reverse Mortgage Loan Right for Me?
If you’re over the age of 62, a Reverse Mortgage may be a sound financial option for you to consider. A reverse mortgage can provide supplemental income for individuals who have significant equity in their homes and can be a path to financial security for those who feel they haven’t sufficiently saved for retirement, all while maintaining home ownership. And unlike a Home Equity Line of Credit, a reverse mortgages line of credit is guaranteed and can never be reduced.
Popularity of Reverse Mortgage
CBS Money Watch reports that in its program’s inaugural year of 1990, 157 reverse mortgages were recorded. The program quickly gained popularity and 2009 brought in a record 114,692 reverse mortgages. Despite a decline during the Great Recession, the number of reverse mortgages has since continued to climb and by 2016, consumers have collectively taken out over 1,000,000 reverse mortgage loans.
Since the Great Recession, stricter regulations have been implemented to protect both lenders and borrowers, so although this can be a more complex and lengthier process than a traditional loan, if the circumstances are right the benefits of a reverse mortgage can be rewarding.
How Does a Reverse Mortgage Work in California?
In a nutshell, anyone who has significant equity on their house can take out a reverse mortgage. California law states, however, that only the primary residence can be considered for this setup.
For all purposes, a reverse mortgage is a loan in that the borrower receives funds that they take against their equity. But unlike a conventional mortgage, the borrower isn’t required to make regular payments to pay off their loan.
Instead, the balance of a reverse loan becomes due when the person sells their home, moves to a new home, or passes away.
You can schedule a lump sum payment, monthly payment, or line of credit structures when you get a reverse mortgage. California law, however, limits the amount of the reverse mortgage loan to the equity of the home. This ensures that the person’s estate or heirs won’t be forced to pay the difference after the homeowner’s death.
In reality, a reverse mortgage still has an interest included. However, this is rolled into the balance, meaning the borrower doesn’t have any upfront payment.
As with most mortgages, the collateral for a reverse mortgage is the property itself. Once the homeowner passes away, the lender will sell the house and use the proceeds to repay the loan, including interests and fees. Any amount left will be returned to the homeowner or their estate.
And as far as the IRS is concerned, a reverse mortgage is still considered a loan advance, even if it seems like pure income for the homeowner. Thus, it’s not subject to tax, and it doesn’t affect your Medicare or Social Security, either.
There are different types of reverse mortgages, which mostly depend on your house’s value.
One is the Home Equity Conversion Mortgage (HECM), backed by the Federal Housing Administration (FHA) and the product offered by most reverse mortgage companies in California.
HECM applies to all houses valued at $822,375 (in 2021) or lower. If the property value is more than this, you should consider a jumbo reverse mortgage. This private loan product allows borrowers to take out up to $4 million. In addition, it has other pros, such as a lower age requirement (60 versus 62 with HECM) and elimination of mortgage insurance payments.
However, since jumbo reverse mortgages are offered by private reverse mortgage lenders, California homeowners are at much more serious risk with them. They’re not backed by the FHA, which means there’s a bigger chance of getting scammed without the same legal safeguards as HECM.
The amount of your home equity factors into getting approved for a reverse mortgage. California lenders vary on their requirements, but the average is at least 50% equity.
Reasons to Consider a California Reverse Mortgage
No matter how appealing it might seem, it’s a big step to take out a reverse mortgage. California homeowners need to be especially careful with their purpose for taking out such a loan because it can be wise for some situations but detrimental in others.
One good reason to take out a reverse mortgage is during an emergency. For example, if the homeowner has serious health conditions and needs a cash infusion to support their medical treatment, a reverse mortgage is a great source. In addition, the lack of a monthly payment eliminates the stress that a typical loan might entail.
Another situation where a reverse mortgage is ideal is if you don’t want to leave your house to your heirs or you don’t have any. This allows you to enjoy the fruits of being a responsible homeowner by getting quick cash for retirement.
It might also be a good idea to use a reverse mortgage to fund repairs or renovations on your home without dipping into your savings.
And speaking of savings, a reverse mortgage can be a sound move if you’re not financially prepared for retirement. It allows seniors to continue living in their homes that they otherwise can’t by providing a supplemental income source. Thus, it could prevent moving to an assisted living facility or a cheaper house. However, this will only work if you can afford the maintenance, taxes, and insurance on your home at the minimum.
Choosing the Right Reverse Mortgage Lenders in California
Getting the best deals starts with going over the best reverse mortgage lenders in California. To do this, you need to know which criteria you’re basing your decisions on.
The first is the reverse mortgage requirements. California lenders will have varying criteria you must meet, such as the minimum equity you need to have. Shop around and look at which lenders fit your situation.
Next, review the type of reverse mortgage on offer. What you pick will depend on how you’ll use the funds. For example, if you need an emergency line of credit, then a lump sum payment won’t be ideal. On the other hand, a regular monthly scheme is perfect if you need it to pay your bills.
After that, compare costs and fees to find the best rate for you. You can get this by requesting a quote from various reverse mortgage companies. California borrowers should be wary, though, that lower costs might be offset in some other way. For example, cheaper interest rates might mean higher upfront fees.
Lastly, look at previous customers’ opinions about the various reverse mortgage companies. California lenders who are members of the National Reverse Mortgage Association are a good sign since lenders under that organization need to follow a certain business ethic to join.
But arguably, the best way is to read reviews and comments to determine the general customer sentiment on lenders. You should also check out a lender’s score in the Better Business Bureau and whether they have any complaints lodged against them. More importantly, look at how they handle these complaints. That says a lot about their level of customer service.
You can also talk to California reverse mortgage consultants to help you out when in doubt. Not only can they find great lenders in your area, but they can also evaluate whether a reverse mortgage is even right for your situation.
Benefits of Reverse Mortgage
Reverse mortgages have become the new retirement plans
If you have been responsible with your mortgage payments and increasing your equity in your home, cashing out on the equity can be a great retirement solution. Many people have used a reverse mortgage to pay for unexpected expenses such as medical bills, debt consolidation, or to create additional income. This type of refinance is also a popular retirement supplement.
You can never owe more than the value of your home, regardless of how much you borrow
If you’re concerned about taking on more financial liability, a reverse mortgage may be a great option for you in that you will not be in more debt than when you originally began.
You can add a borrower who was not on the original loan
For example, if your original loan was executed without your spouse listed as a co-signer, this can present complications if you were to pass and your spouse may not be able to remain living in the home or receive income from your mortgage.
You can remove a borrower who was on the original loan
You can remove a borrower if your situation has changed since your original mortgage. This can alleviate headaches associated with your heir of your home later.
Questions to Consider Before You Refinance
What do you need the cash for?
Do you need to pay off a medical bill or property taxes? Regardless of the reason for the expense, you will want to consider all of your financial options first before pursuing a reverse mortgage. Determining your reason for the cash will help you with your decision-making process.
How much equity do you really have?
Do you have enough saved to pay all the fees?
Have all property taxes and homeowners’ insurance been paid?
Do you plan to move?
Make sure you meet all the criteria
This home must be your main residence. In certain situations, consultation with a no or low cost Home Equity Conversion Mortgage (HECM) counselor may be required so that they may guide you through the process. More specific questions can be answered through the U.S. Department of Housing and Development (HUD).
Reverse mortgages can be a great option for those who have been responsible with their initial mortgages and home ownership.
They provide a relatively safe opportunity to get cash but as with any big financial decision, borrowers should first consult a professional financial advisor.
If you feel that a reverse mortgage is the right decision for you, please fill out this form and we’ll be happy to follow up with you!
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